Forensic Accounting

Cumulative Impact of Change Orders –

Real But Difficult to Prove
By James L. McGovern & Jack A. Lazarczyk

W
e never thought we would es.” Coates Indus. Piping, Inc., VABCA No. ously incurred by approved change orders
say it, but two plus two, 5412, 99–2 BCA ¶ 30,479, 150,586. and other factors, such as a contractor’s
sometimes, is more than Two points are important when consid- self-inflicted harm.
four. While this may appear ering cumulative impact. One, there is no Representative Cases
like an introduction to a bad accounting bright line as to exactly when cumulative Claims for cumulative impact have been
joke, it is an accurate description of what is impact occurs, and two, the true cost of recognized since the late 1960s after the
known in the construction industry as the cumulative impact is often not discovered federal government changed the Standard
cumulative impact of change orders. until project completion. Changes Clause in 1967, adding language
What is Cumulative Impact? The sum of individually priced change that covers the effect of changes on un-
Change orders are a fact of life on nearly orders typically fails to capture cumulative changed work. Prior to then, the Rice Doc-
all construction projects. They come from impact. The Electrical Contracting Founda- trine had precluded courts from consider-
design changes, owner’s requests or un- tion (ECF), the Construction Industry In- ing the effect of change orders on portions
foreseen circumstances or conditions. It is stitute (CII) and the Mechanical Contract- of the work not directly covered by the
expected and anticipated by contractors. ing Foundation (MCF) have commissioned change as ruled in United States v. Rice 317
They can add, subtract or modify work on research in this area conducted by professor U.S. 61 (1942).
projects and are typically accommodated Awad Hanna of the University of Wisconsin However, since then findings on the ap-
without disrupting the base work or af- – Madison. Hanna’s research confirmed the plication of cumulative impact damages has
fecting the overall schedule. However, on impact of multiple change orders on labor not yielded a bright-line solution in the law.
some projects, there comes a point when productivity and offered a methodology to In the cases where cumulative impact dam-
the number of changes starts impacting quantify it. Id. At 125(4), 224–232. ages were denied, one or more of the follow-
the overall progress and productivity on While cumulative impact damages have ing reasons were cited: (a) the change orders
the project. been recognized in theory, the resulting did not result in a fundamental change in
Cumulative impact has been described claims are often viewed by owners and the contract; (b) there was insufficient proof
as, “The unforeseeable disruption of pro- their representatives with skepticism. The of a causal connection between the change
ductivity resulting from the synergistic ef- challenge lies in proving causation and orders and lost productivity; or (c) waiver
fect of an undifferentiated group of chang- segregating the damages from costs previ- language in the contract or change orders
prohibited recovery.
Bell BCI Co. Case
James McGovern is a founding partner of McGovern & Greene LLP, a forensic accounting and litigation
One case that stands out as particularly
services consulting firm. He is a certified public accountant, certified in financial forensics and a certified
valuation analyst. He works as a consultant and expert witness on matters involving complex financial and
instructive is Bell BCI Co. v. United States
economic damage issues. Jack A. Lazarczyk is a senior consultant at McGovern & Greene, LLP. He is a
81 Fed. Cl. 617 (2008).
licensed CPA and a certified valuation analyst. He works on consulting and expert witness assignments Back in 2008, the contracting commu-
involving valuations and economic damages. He has over 20 years of combined architectural, engineering nity was on the edge of its seat, reading an
and financial experience in both the public and private sectors. opinion issued by the United States Court
of Federal Claims. The opinion validated
what many in the construction industry al-
ready knew, but had a hard time proving;
namely that, multiple change orders can
cause damages by reaping havoc on project
schedules and productivity.
Bell BCI Company was hired to construct
a laboratory building at the National Insti-
tute of Health (NIH) campus in Bethesda,
Maryland. NIH issued more than 200 con-
tract modifications, which included the ad-
Jack A. Lazarczyk James L. McGovern
dition of a new floor nine months into the
construction. These changes delayed the

20 | www.AttorneyAtLawMagazine.com
completion of the project by 19½ months
and increased the contract price by 34 per-
cent or $21.4 million. Although Bell was
paid for most of the change orders, the
company asserted an impact claim for the
cumulative affect of the changes on Bell’s
overall performance.
Judge Thomas C. Wheeler found in favor
of Bell and noted in a brief summary that
the addition of a new floor after construc-
tion had begun caused many mechanical
and electrical changes after the work had
already been installed. While the changes
and delays continued to accumulate, NIH
and its representative compounded the
problems by directing Bell to perform ex-
tra work without time extensions or autho-
rizing Bell to accelerate performance. The
judge found NIH’s defense of accord and
satisfaction without merit and awarded
Bell all of their claimed damages in the
amount of $6,200,672 plus interest. The
awarded damages included: (1) $563,125,
the unpaid balance of the contract price;
(2) $1,610,987 for unresolved changes; (3)
$1,602,053 for the delays of remaining on
the project after the original completion
date; (4) $2,058,456 in labor inefficiency
costs attributable to the cumulative impact
of the changes; and (5) $366,051 as a 10
percent profit on the delay and labor inef-
ficiency costs.
The court’s finding in favor of Bell,
however, did not create an automatic pas-
sage for Bell’s subcontractors. Out of five
subcontractor pass through claims, the
court sustained only one. The key factor
in this decision was that the subcontrac-
tors did not submit any specific evidence
as to their damages and they did not
present any witnesses at trial. The suc-
cessful subcontractor whose claim was
sustained, presented measured mile based
calculations of damages and presented
witnesses at trial.
The Appeal
NIH appealed the Federal Claims court
decision to the U.S. Court of Appeals for
the Federal Circuit. See Bell BCI Co. v.
United States 570 F.3d 1337 (2009). The
appeals court focused its attention on one
particular modification, Mod 93 that Bell
signed for costs and time incurred as a re-
sult of a material change to the contract,
under which NIH wanted to add an ad-
ditional floor to its five-story project. Mod
93 was different from previous modifica-
tions in that it contained new waiver and
release language stating:
The modification agreed to herein is
a fair and equitable adjustment for
the Contractor’s direct and indirect
costs. This modification provides full
compensation for the changed work,
including both Contract cost and
Contract time. The Contractor here-
by releases the Government from any
and all liability under the Contract
for further equitable adjustment at-
tributable to the Modification.
Bell argued that by signing this modifi-
cation, it was agreeing to the cost of add-
ing the additional floor, including indirect
costs and impacts such as extended home
and field office overhead. Bell claimed that
it did not intend to waive its right to re-
cover future delays and impacts caused by
cumulative changes to its work. There were
more than 100 modifications, combining
279 extra work orders issued after Mod 93,
causing Bell further delay, disruption and
loss of productivity.
The trial court sided with Bell, finding
that waiver language in Mod 93 did not
address cumulative delay and impact. The
appeals court, however, reversed, hold-
ing that modification language released
the government from any and all liability
attributable to Mod 93, including cumu-
lative impact and delays. The appellate
court’s opinion was not unanimous; it was
accompanied by a dissenting opinion from
Judge Newman, who found the findings
and rulings of the trial court to be fully
supported by the evidence and the law, and
should have been affirmed. In the discus-
sion, Judge Newman pointed that:
…the cumulative impact and inef-
ficiency problems did not arise right
away, but burgeoned as changes con-
tinued to be required. The trial court
did not err in holding that the release
terms in Mod 93 did not bar com-
pensation for future events, for it was
not disputed that Bell was told that
no more than 4-6 Extra Work Orders
should be expected, and that 279 Ex-
tra Work Orders caused cumulative
disruption, delay, and inefficiencies.
Vol. 3 No. 1 Attorney at Law Magazine® Chicago | 21
The appeals court remanded the case to
the Court of Federal Claims to determine
what portion of Bell’s cumulative impacts
and delays were attributable to Mod 93 or
other modifications containing the same
waiver language.
In our opinion, determining a particular
change order’s contribution to the cumula-
tive impact is a very difficult, if not impos-
sible, task. It goes against the grain of the
very premise of the cumulative impact; that
the damages are not caused by individual
events, but their aggregate. Not surprisingly,
that task was never completed in that case
as attorneys for the government and the
contractor, Bell, submitted a joint stipula-
tion of dismissal to the U.S. Court of Fed-
eral Claims ending seven years of litigation.
Lessons from the Case
The Bell case affirmed that while a cer-
tain quantity of change orders is nearly
inevitable on a construction project, there
is some point where multiple changes cu-
mulatively impact a contractor’s ability to
perform the work efficiently. In fact, Bell’s
methodologies for quantifying the cumu-
lative impact survived the rigor of litiga-
tion. However, in the end, Bell did not pre-
vail because the release language contained
in Mod 93 limited Bell’s entitlement.
Bell’s experience points to several rec-
ommendations for contractors and their
advisers. Proving cumulative impact re-
quires excellent tracking of productiv-
ity on the job. Documenting periods of
unimpacted performance is as impor-
tant as doing so when things go poorly.
Technological advances make it easier to
maintain detailed daily logs, track cost
and time based on distinct activities. A
contractor’s very best performance data
can be used as a benchmark on the same
or other projects. Reliance on expert and
lay testimony combined with a well-orga-
nized compilation of the historical events
of the project will go a long way toward a
successful outcome.
Even the best record keeping and
analysis, however, can be rendered use-
less by inadvertently signing a waiver or
release. Thus, contractors should be very
careful when presented with waivers and
pay close attention to what is expressly
covered by the waiver. When in doubt, it
is always best to consult with an experi-
enced attorney.